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Finish The Job

This note was originally published at 8am on January 07, 2013 for Hedgeye subscribers.

“Give us the news and we will finish the job.”

-Winston Churchill

 

That’s what Churchill said to President Roosevelt in the spring of 1941 as the British were still pleading for America’s hand in taking down one of Germany’s most important ships - The Bismarck (The Last Lion, page 359).

 

With the US Dollar on the cusp of another long-term breakout from its bombed out base, that’s what I am still begging for. President Obama, get the Fed and Congress out of our way and we will let free-market pricing Finish The Job.

 

Strong Dollar, Strong America.

 

Back to the Global Macro Grind

 

The US Dollar was up smartly last week. Closing +1.1% to $80.50, that was the 11th week out of the last 15 that the US Dollar Index closed flat to up. And the global economy liked it.

 

For the US stock market to have its best up week in a year on an up week for the US Dollar is not only progressive, but very new. If you want any chance at sustained US and Global Economic Growth, you need to see this Dollar strength confirmed.

 

For what feels like forever, we have warned of the Fed/Congress (monetarily and fiscally) perpetuating what we call The Correlation Risk (Debauched Dollar = Inflated Asset Prices, not real-inflation adjusted economic growth).

 

To be clear, this opportunity for the US Government to get out of the way is fleeting – but we just saw, on a very immediate-term basis, what that could look like if Obama gives us that news.

 

Look at these positive 15-day immediate-term TRADE correlations:

  1. US Dollar vs. SP500 = +0.48
  2. US Dollar vs. MSCI Emerging Markets Index = +0.79
  3. US Dollar vs. US Treasury 10yr Yield = +0.62

Again, these are very immediate-term changes in the Global Macro Risk Factoring of the market – but they are not new to US and Global Economic history. During both the Reagan (1983-1988) and Clinton (1993-1999) sustained US Economic Growth periods, we had A) Strong Dollar and B) Deflated Commodity prices.

 

*Class Warfare fans: that would be good for lower-income populations and bad for the only class I’ll call a “class” - the #PoliticalClass.

 

Importantly, if I push the duration of these US Dollar correlations out to 120-days (i.e. when we were of the view that Global Growth was still slowing), here’s what the negative Correlation Risk looks like:

  1. USD vs SP500 = -0.75
  2. USD vs MSCI EM = -0.73
  3. USD vs UST 10yr Yield = -0.57

In other words, the Weak Dollar, Slow Growth world can come back in a hurry if policy makers think more policy that hasn’t worked is the answer. That said, for now (as in what someone needs to forward to Axelrod to read right now), as global economic growth goes from SLOWING to STABILIZING:

 

A)     The US Dollar has stopped going down

B)      Commodities have stopped inflating

C)      Both Bonds and Gold have started to go down (relative to stocks), big time

 

That last point is driving Gold/Bond bulls nuts, because it too is very new. But it makes sense. That’s precisely the reason why most growth investors who own Gold now didn’t buy it in the 1990s. Absolute returns were a lot higher in productive assets (Tech).

 

Last week’s signals from the US Treasury market were both explicit and fundamentally driven:

  1. Global Growth Data (across Europe and Asia in particular) continued to stabilize/accelerate
  2. US Employment Data continued to stabilize
  3. Tim Geithner said he’s leaving

All of this was good news for both global growth and the US Dollar. They have both causal and correlated relationships. They are also reflexive. And they are screaming at us from a quantitative risk signaling perspective:

  1. US Treasury 10yr Yield long-term TAIL risk breakout line = 1.84% (TREND support under that at 1.70%)
  2. Yield Spread (10yr minus 2yr, a good proxy for marginal slope of growth) = +19 basis pts wider wk-over-wk
  3. US Dollar Index moved back into a Bullish Formation (bullish on all 3 of our core durations: TRADE/TREND/TAIL)

There’s a very unique opportunity for the President of the United States to provide both American savers and those starving from food/energy inflation globally to Finish The Job here. Yes We Can buy into him just getting US government out of the market’s way.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1636-1664, $110.01-113.06, $3.63-3.75, $80.24-80.58, $1.30-1.32, 1.84-1.96%, and 1434-1477, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Finish The Job - Chart of the Day

 

Finish The Job - Virtual Portfolio


THE WEEK AHEAD

The Economic Data calendar for the week of the 21st of January through the 25th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - week


Quick Thoughts on CAG Debt Issuance

ConAgra (CAG) is in the process of raising $3.975 billion in debt to complete its acquisition of Ralcorp (RAH).  The weighted average interest rate of the debt issuance is 2.879% - well below the 4% number mentioned by CAG management on the conference call discussing the transaction.

 

Quick Thoughts on CAG Debt Issuance - CAG Prospectus

However, recall that the total transaction size is $6.560 billion and that a portion of that (approximately $1.9 billion) represents the assumption of outstanding RAH debt.  RAH debt isn’t cheap – 6.3% weighted average interest rate.  CAG has already moved to “correct” that interest rate structure, commencing a tender for approximately $670 million of RAH debt, with a cost above 7.25%.

 

The net of this is blended interest rate right around 4% (newly issued debt plus assumed debt).  We are therefore reluctant to increase our synergy estimate at this point as some analysts have done – we remain at $0.15 - $0.20.  We recognize that there is upside to that number as CAG continues to correct the debt structure at RAH to more appropriately reflect current market rates.

 

Still, we remain very constructive on CAG shares as we see a favorable risk/reward with upside toward $37 - $38 a share.  We see CAG as a relatively inexpensive name (13.8x calendar 2013 EPS versus the packaged food group trading at 17.6x) that has additional upside to earnings on a standalone basis as well as a transformative acquisition that is scheduled to close during calendar Q1 2013 that should provide investors a path to a higher EPS profile through accretion and synergies.

 

Enjoy the long weekend,

 

 - Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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Hedge Funds Get Longer Corn

Corn prices have continued to inch upward in the wake of the WASDE and Quarterly Stocks report.

 

Non-commercial positions turned bullish on a weekly basis for the first time since early December ‘12 as it appears that hedge funds moved to chase the price of corn.  Slightly over 21K futures contracts were added on the long side offset by 13.4K contracts short (net positive 7.8K, 58% net bullish positioning).


Net positioning (net long positions/net short positions) remains bullish at 166%, well off the ’12 highs that we saw back in December (525%).


Our bias continues to be short corn, but we also recognize that there is a bit of a data vacuum over the next two months, and that we might see some upward pressure as hedge funds “correct” positioning into planting intentions.

 

Hedge Funds Get Longer Corn - CFTC Corn

 

Enjoy the long weekend.

 

 - Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

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TRADE OF THE DAY: WYNN

Today we shorted Wynn Resorts (WYNN) at $125.23 a share at 10:38 AM EDT in our Real-Time Alerts. Hedgeye Gaming, Leisure and Lodging Sector Head Todd Jordan says to short WYNN at our immediate-term TRADE overbought signal.

 

TRADE OF THE DAY: WYNN - image001


MORE CONFIRMING EVIDENCE FROM CHINER

Takeaway: The latest data is incrementally supportive of three of our best ideas on the long side in Asia (Chinese consumer, Hong Kong and Singapore).

SUMMARY CONCLUSIONS:

 

  • We continue to receive confirming evidence of a cyclical recovery in the Chinese economy. This directional strength out of the world’s second-largest economy and core contributor to global GROWTH should continue to underpin our 1Q Macro Theme of #GrowthStabilizing.
  • On the strength of this proactively predictable pickup in Chinese economic activity and the Chinese Communist Party’s purported POLICY agenda, we continue to hold a bullish bias on Chinese consumer stocks and select international consumer names with a strong Chinese footprint with respect to the intermediate-term TREND and long-term TAIL.
  • Additionally, both Hong Kong and Singapore (our other two long ideas in Asia on the equity front) should continue to benefit from a rebound in Chinese demand – albeit rather muted relative to China’s glory days – with respect to the intermediate-term TREND.

 

Both the data and the tape(s) continue to support our 1Q Macro Theme of global #GrowthStabilizing. Moreover, the fundamental RESEARCH signals continue to affirm what our quantitative RISK MANAGEMENT signals have been suggesting since early-DEC.

 

ANALYSIS OF KEY DATA AND TRENDS

With regards to China specifically, we received a heaping helping of the country’s 4Q, DEC and JAN GROWTH data overnight; on balance, it was broadly positive – which was in-line with our expectations of continued directional improvement throughout the Chinese economy:

 

  • SURVEY DATA
    • JAN MNI Flash Manufacturing PMI: 54.9 from 52.2
      • New Orders: 54. 6
      • Production: 53.1
    • 4Q Business Climate Index: 124.4 from 122.8; first sequential uptick since 2Q11
    • 4Q Entrepreneur Confidence Index: 120.4 from 116.5; first sequential uptick in three quarters
  • HEADLINE GROWTH DATA
    • 4Q Real GDP: +7.9% YoY from +7.4% vs. a Bloomberg consensus estimate of +7.8%
      • QoQ: +2% from +2.1%
      • 2012 Real GDP: +7.8% YoY from +9.3%
  • HIGH-FREQUENCY GROWTH DATA
    • DEC Industrial Production: +10.3% YoY from +10.1% vs. a Bloomberg consensus estimate of +10.2%
      • 2012 Industrial Production: +10% YoY from +13.9%
      • Steel Products: +14.5% YoY from +15.9%
      • Cement: +3.8% YoY from +6.9%
      • Processing of Crude Oil: flat at +9.9%
      • Electricity Production: +7.2% YoY from +8%
    • DEC Retail Sales: +15.2% YoY from +14.9% vs. a Bloomberg consensus estimate of +15.1%
      • 2012 Retail Sales: +14.3% YoY from +17.1%
    • YTD-DEC Urban Fixed Assets Investment: +20.6% YoY from +20.7% vs. a Bloomberg consensus estimate of +20.7%
      • 2012 Urban Fixed Assets Investment: +20.6% YoY from +23.8% in 2011
    • DEC Electricity Output: +7.6% YoY from +7.9%
      • 2012 Electricity Output: +4.6% YoY from +12% in 2011
  • PROPERTY MARKET DATA
    • DEC New Residential Property Prices:
      • MoM Gainers: 54 cities from 53 cities; 54 cities is the largest number of cities posting sequential gains since APR ‘11
      • YoY Gainers: 40 cities from 25 cities
    • YTD-DEC Housing Starts: -6.7% YoY from -7.2%
    • YTD-DEC Floor Space of Buildings Under Construction: +12.9% YoY from +13.3%
    • YTD-DEC Floor Space of Completed Buildings: +11.4% YoY from +14.1%
    • YTD-DEC Land Areas Purchased: -13% YoY from -14.8%
    • YTD-DEC Total Sales of Buildings: +9% YoY from +9.1%
    • YTD-DEC Floor Space of Buildings Sold: +1.2% YoY from +2.4%
    • YTD-DEC Total Funds Earmarked for Real Estate Development: +16% YoY from +14.1%
    • DEC Real Estate Climate Index: -3.3% YoY from -4.2%

 

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To put this generally positive into context, we parse out some of China’s previously reported DEC economic data below:

 

  • SURVEY DATA
    • DEC NFLP Manufacturing PMI: flat at 50.6
      • Input Prices: 53.3 from 50.1
      • New Orders: flat at 51.2
      • New Export Orders: 50 from 50.2
      • Employment: 49 from 48.7
      • Output: 52 from 52.5
      • Backlogs of Orders: 45.9 from 45.3
      • Imports: 49 from 48.5
      • Inventories: 49.4 from 48.8
      • Inventories of Raw Materials: 47.3 from 47.9
      • Purchasing of Inputs: 52.1 from 51.4; highest since APR '12
      • Suppliers’ Delivery Times: 48.8 from 49.9
    • DEC Non-Manufacturing PMI: 56.1 from 55.6; a four-month high
      • Construction PMI: 61.9 from 61.3
  • HIGH-FREQUENCY GROWTH DATA
    • DEC New Yuan Loans: +454.3B MoM from +522.9B
    • DEC M2 Money Supply: +13.8% YoY from +13.9%
    • DEC Aggregate Yuan Financing: +1.63T MoM from +1.14T prior and +1.27T in DEC ‘11
      • New yuan loans totaled 8.2T yuan in 2012, accounting for 52% of the 15.8T yuan of cumulative aggregate financing in 2012 (which was up +2.96T from 2011; or up +23% on a YoY basis from down -8.5% in ‘11). This is the lowest ratio of bank loans to total social financing since the PBOC started compiling the figures in 2002, when bank loans had a 91.9% share.
      • The +534% annual increase in Trust Loans to 1.28T in 2012 is quite a bit worrisome in that it could potentially be plastering over current delinquencies or foreshadowing future asset-liability mismatches among China’s lowest-quality borrowers, but that risk is neither here nor there for now.
    • DEC International Capital Flows: +2% YoY from +1%
      • It should be noted that Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC), recently confirmed that China is thinking of expanding RMB qualified foreign institutional investment (RQFII) and QFII quotas in the future.
      • Currently, the schemes only account for around 1.5% to 1.6% of the A-share market in China, and Shuqing hopes that this size will expand ~10x in the future.
    • DEC Foreign Direct Investment: -4.5% YoY from -5.4%
      • For the full year, inflows fell -3.7% to $111.7B from a +9.7% increase in 2011, while China's non-financial investment abroad increased +28.7% to $77.2B.
    • DEC Exports: +14.1% YoY from +2.9% prior vs. +5% Bloomberg consensus
    • DEC Imports: +6% YoY from flat prior vs. +3.5% Bloomberg consensus
    • DEC Trade Balance: $31.6B from $19.6B
  • INFLATION DATA
    • DEC CPI: +2.5% YoY from +2%
      • Food: +4.2% YoY from +3% (vegetable prices up +14.8% YoY in DEC on the strength of China’s coldest winter in nearly three decades)
      • Non-Food: +1.7% YoY from +1.6%
    • DEC PPI: -1.9% YoY from -2.2%
      • Manufacturing: -2.5% YoY from -2.9%

 

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Again, when all of the numbers are appropriately crunched, it’s plain to see that the Chinese economy is an acceleration phase with respect to both its GROWTH and INFLATION figures – something we have been calling for as early as the first of NOV.

 

MORE CONFIRMING EVIDENCE FROM CHINER - CHINA

 

THE KEY TAKEAWAYS

It’s long been our view that Chinese GROWTH will not accelerate demonstrably to the upside over the intermediate-term TREND or long-term TAIL.

 

Moreover, our primary investment thesis regarding the Chinese economy centers precisely around taking advantage of the deliberate economic restructuring implied by our fundamental conclusion: LONG the Chinese consumer and SHORT the global mining CapEx bubble (not from every price, of course).

 

To the extent you’re not yet familiar with this thesis, please review the following two notes and/or send us an email to set up a call.

 

  1. CHINA CRAWLS FORWARD, WHICH IS BETTER THAN CRAWLING BACKWARDS (12/10)
  2. KEY CALLOUTS FROM CHINA’S CENTRAL ECONOMIC WORKS CONFERENCE: EXPECT MORE OF THE SAME (12/17)

 

As a point of keeping score, Chinese consumer stocks (MSCI China Consumer Discretionary Index) is the second-best performing sector on the MSCI China index since 12/10 (#1 is Financials on cyclical NIM expansion) and is outperforming the MSCI China index by ~250bps.

 

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With the Shanghai Composite Index continuing to track in a Bullish Formation on our quantitative factoring, our view continues to be insulated by market beta.

 

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Also, our proprietary G/I/P outlook continues to auger well for continued strength in the CNY, which is just shy of 19YR highs. This is backed by continued pledges of “prudent” monetary POLICY out of the PBOC in the face of a subdued 2013 INFLATION target (+3.5%). Strong yuan = Strong Chinese consumer.

 

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UPSIDE AND DOWNSIDE RISKS

From our purview, the next major catalyst to come down the pike on the POLICY front is the 12th National Party Congress, which convenes in MAR. There, members of the new seven-man Politburo will assume their formal roles as leaders of the Chinese state and formally outline their strategies to promote domestic demand.

 

We’re hoping for meaningful improvement on the social security front and perhaps some degree of early hukou reform(s) that may help advance China up the urbanization curve, but we’d settle for a continued focus on tax incentives and subsidies for now. Rome wasn’t built in a day.

 

Also, while perhaps not necessarily a catalyst, a rather important callout is the somewhat-shaky stabilization of China’s property market (~13% of GDP and ~25% of GFCF). Furthermore, to the extent recent price trends continue unabated throughout 1H, we could see the China’s Ministry of Housing and Urban-Rural Development (MOHURD) implement further tightening measures atop the existing ones they recently pledged to “unswervingly enforce” in order to “strictly curb speculation”.

 

Expanding the existing trial property taxes to a nationwide level would be one avenue they could pursue, but the latest official leanings on such a maneuver appear a bit on the dovish side. In fact, Premier Wen Jiabao recently signaled a delay in implementation amid further central government studies.

 

For now, China’s property market, and, by extension, it’s property developers have ample political headroom continue higher – at least over the next few months.

 

SUMMARY

In conclusion,  we continue to receive confirming evidence of a cyclical recovery in the Chinese economy. This directional strength out of the world’s second-largest economy and core contributor to global GROWTH should continue to underpin our 1Q Macro Theme of #GrowthStabilizing.

 

On the strength of this proactively predictable pickup in Chinese economic activity and the Chinese Communist Party’s purported POLICY agenda, we continue to hold a bullish bias on Chinese consumer stocks and select international consumer names with a strong Chinese footprint with respect to the intermediate-term TREND and long-term TAIL.

 

Additionally, both Hong Kong and Singapore (our other two long ideas in Asia on the equity front) should continue to benefit from a rebound in Chinese demand – albeit rather muted relative to China’s glory days – with respect to the intermediate-term TREND.

 

Darius Dale

Senior Analyst

 

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